Champagne Wishes and French Fry Dreams

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Editor’s Note: This week’s commentary centers around a few quotes that suggest consumer weakness may be broadening. There are also a couple of reasons to be optimistic for a rebound for cyclical companies though. We also highlight an underappreciated potential catalyst for Tesla.

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-Scott

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Two quotes stood out in this week’s issue of the Transcript. Both happened to be about food. The first quote was from LVMH talking about its wine and spirits business. LVMH’s CFO said that the company is experiencing a “severe demand issue in champagne.”  He went on to explain that “champagne is quite linked with celebration, happiness, et cetera. Maybe the current global situation, be it geopolitical or macroeconomic doesn't lead people to cheer up and to open bottles of champagne.”

The second quote was from french fry supplier Lamb Weston, which saw that “the operating environment has changed rapidly during fiscal 2024 as global restaurant traffic and frozen potato demand softened. In fact, the downward traffic trends accelerated during the back half of the year and into early fiscal 2025.”

Broadening Consumer Weakness

Taken together, these quotes suggest that there is real weakness in the consumer that is starting to expand beyond just the low-income cohort into a broader subset. LVMH is of course a luxury brand and so struggles for that company indicate that higher income consumers are starting to tighten spending. In contrast, Lamb Weston’s french fries represent a minor-splurge purchase for consumers across the income spectrum. Up until recently, we’ve seen that low-income consumers continued to spend and would even avoid trade-downs despite a weakening financial picture. That may be starting to change.

In addition to these two quotes, it was also troublesome that Comcast saw weakness in its theme park business. Parks are another splurge purchase for consumers across income cohorts. After the pandemic, amusement parks saw a surge in attendance as consumers shifted spend from goods to experiences. An amusement park slowdown suggests that this wave may be over and that consumers may be feeling more pinched.

Bottom for cyclical industries?

Still, there are at least a couple of noteworthy counter-balances to these worrisome consumer trends.  UPS “returned to volume growth in the U.S., the first time in nine quarters“ and from Robert Half which is “clearly seeing signs of project deferrals” but is already 8 quarters into that trend and has never experienced more than 10 quarters of contraction. I found those quotes to be positive because they are indicators that two cyclical industries may have reached the bottom of contractions that have been relatively long in duration but have also gone somewhat unnoticed. These quotes supported the idea that we’ve actually been experiencing a mild recession for some time but it has been overshadowed by strong stock market performance that was led by a narrow subset of AI-driven stocks.

As the Fed gets ready to begin lowering interest rates, these companies may be poised for a more traditional cyclical rebound. This may help explain the dynamic that boutique investment bank Moelis and Co noted on its earnings call: “in the last 2 or 3 weeks, you've seen a tremendous rotation into the Russell 2000 in the middle market.” 

Personally, I continue to be somewhat skeptical of the long-term growth prospects for middle market companies that make up the Russell 2000, but on the other hand, perhaps this is the type of sentiment that is the hallmark of a bear market bottom. Moelis did note that the rotation into the Russell 2000 is good for Private Equity sponsors who tend to hold portfolios comped to this class of company. Equity capital markets are yet another line of business that has been in a prolonged freeze.

Tesla’s FSD blitz

Outside of macroeconomic commentary, there was one other earnings call that stood out last week. Tesla reported results were weak because of a “hangover” in EV demand; however, this is not what stood out. What stood out was Musk’s commentary on Tesla’s self-driving vehicle development, specifically the aggressiveness of Tesla’s go-to-market strategy for FSD. 

Source: Tesla

Musk believes that FSD is on the cusp of being solved and when it is, he outlined a vision that the company would simply flip a software switch that could turn the full install base of Teslas into a fleet of 10 million robo-taxis. This was not new information but its magnitude was striking. In fact it’s such a shocking concept that even the analysts on the call didn’t seem to fully comprehend, prompting Elon to clarify “I guess I'm not -- I'm not conveying this correctly. The entire Tesla fleet basically becomes active.”

I have no idea how close Tesla really is to achieving a full self-driving vehicle but it does seem to be getting closer and closer. Waymo has already logged 20 million passenger miles in its vehicles, but it would be difficult to compete with Tesla’s immediate scale. Certainly Uber and Lyft, along with their 1.7 million U.S. drivers, could face an abrupt and jarring new reality. If Tesla does crack FSD soon, it could bring a large societal change with unprecedented pace. Of course, especially with Elon, it’s tough to differentiate timelines between hype and reality. But his estimate is that FSD could push Tesla to a $5 Trillion valuation. I’m not sure that I can disagree.